Generational war: a monster of our own making

Evidence suggests policies brought in to avert fiscal crisis and generational inequality may actually be generating these very outcomes.

The political debate over generational equity, which has been rekindled in the past week, now dominates discussions over wealth, government spending and fiscal sustainability. But a closer look at some recent findings suggests counter-intuitive results: policies to avert fiscal crisis and generational inequality may instead be generating these very outcomes.

No drop-off in worker numbers

It is important to put the current debate in perspective. To date, there is little evidence that policy and politics are organised around a generational “war”. The generational solidarities built in the family appear much stronger than the financial divides identified by economists.

The problem is also not quite what it appears on the surface. Reading about population ageing, you might be forgiven for believing that living standards in Australia were set to fall due to a dwindling supply of workers. That is simply not the case.

The most recent Intergenerational Report, released by Treasury in 2010, shows that the dependency ratio – that is, the number of people of workforce age as a proportion of the entire population – will be much the same in 2030 as in 1970. That is because population ageing not only adds to the numbers of people aged 65 and above, it also proportionally reduces the numbers of very young dependents as well.

It gets better. More of the potential workforce now actively engages in paid work, reflecting the mass entry of women into the workforce. As a result, the average number of hours worked per person (across the whole population) is set to be much the same in 2050 as in 1980. Unsurprisingly, then, per capita incomes are set to increase until 2050. Recession and unemployment are more serious economic threats.

Most concern instead focuses more narrowly on analysis of government budgets. Projections have shown rising health and pension costs, raising concerns that younger workers will be required to either pay higher taxes, receive lower benefits in the future, or both.

As a result, policymakers have urged governments to reduce these future costs by encouraging (and requiring) citizens to save and then pay themselves. Australia has expanded superannuation, raised the pension age and are now considering creating new user payments for health care.

Wealth is increasingly correlated with age

However, this analysis has tended to focus only on the most obvious and direct forms of government spending, and has tended to ignore other forms of support and intergenerational transfers. Putting those broader considerations back into an analysis changes things.

First, take the recent finding from the Grattan Institute that older households have overwhelmingly been the beneficiaries of an increase in household wealth. The report suggests this may signal growing intergenerational inequality and conflict.

Yet far from being a surprise, this is entirely consistent with the policy advice of previous economic reports into population ageing. Those policies encouraged user payments and saving over the life course. The result has been higher fees for young people undertaking education, and incentives for older people to accumulate assets. We would expect these policies to produce exactly the outcome Grattan finds: that wealth is increasingly correlated with age.

These policies exchange one form of intergenerational transfer for another; replacing tax rises for interest and rent payments. Given that income taxes are progressive while rent is regressive, this is likely to reinforce, rather than remedy, broader inequalities. By not considering the distributional outcomes of the market alternatives to public provision we see only one side of the ledger.

Superannuation tax concessions versus pensions

Unfortunately, it is unlikely that younger workers benefit from lower taxes either. Encouraging people to save also has costs. Since the 1980s, the government has provided increasingly large subsidies for the two main savings vehicles – superannuation and housing. On Monday, we got an update on the costs of these subsidies as part of the government’s budget update. It makes sobering reading.

The tax concessions that support savings – through superannuation and housing – are now much larger drains on the budget than the public spending they are designed to protect. Superannuation concessions are growing at almost A$5 billion per year. In contrast, Australia spends less on public pensions than almost any other developed country.

Those costs reflect the equity of the payments. The pension is targeted to those in need. Tax concessions tend to favour the highest earners. This means pensions achieve adequate retirement incomes more efficiently. The same is true in health care, where the subsidy for the private health insurance rebate is growing faster than Medicare as a whole.

Finally, these measures also leave out unpaid services, particularly care. Including unpaid care reveals substantial transfers from old to young, and from women to men. Ironically, while women provide the bulk of unpaid care, they rely more heavily on paid care – in part because they outlive male partners. Charging for care therefore means its main providers also pay the most.

All this shows we need to treat generational analysis with caution. There is much to be learnt by looking at our experience of inequality over the life course. But simply looking at public spending distorts our understanding. And as we look closer, we see the inequalities within generations remain far more significant than those between them.

IMPORTANT: This information has been prepared without taking into account your objectives, financial situation or needs and you should consider if the information is appropriate for you before making an investment decision. Unless otherwise specifically stated or disclosed (such as the InvestSMART Diversified Portfolios Product Disclosure Statement), neither InvestSMART Financial Services Pty Ltd nor any of its Related Companies make any recommendations as to the merits of any investment opportunity referred to in its emails or its related websites. Product disclosure statements for financial products offered through InvestSMART can be downloaded from this website or obtained by contacting 1300 880 160. You should consider the product disclosure statement before making a decision about the product. All indications of performance returns are historical and can not be relied upon as an indicator for future performance.